As many of you many now know, BoA has faced intense scrutiny over the last several weeks. A few weeks back, we covered the controversy clouding the bad loan settlement the bank negotiated with investors, in which BoA managed to secure a tremendously favorable outcome. Just a few days ago, Morgenson penned a follow up piece documenting New York Attorney General Eric Schneiderman’s decision to challenge the settlement. Apparently, Schneiderman takes issue with a number of the settlement’s terms, particularly those that preclude private litigants who may have suffered from the bank’s troubled loans from making a further claim.

The settlement has prompted other investors, like AIG, to join in on the litigation against the bank. As Morgenson and Story’s article points out, BoA has encountered 25 suits related to the financial crisis thus far, many more than any other American bank. Moreover, the journalists correctly tie this ongoing litigation into a broader theme: the federal government’s inability to successfully prosecute members of the banking industry.

Citing legal scholars and the insiders at the Justice Department, the writers imply that the lack of government intervention may be the result of the higher standard of proof necessary to secure a criminal conviction. This notion has been buttressed by the fact that federal prosecutors were unable to deliver a conviction against Washington Mutual and Countrywide, two banks that have been involved in Justice Department investigations. These failures, unfortunately, create a situation in which investors must regulate the banks through litigation, which is extraordinarily costly and inefficient for all parties involved.

Whether the suit has any merit is a question in and of itelf—BoA rebuts AIG’s claims by arguing that the securities at issue appeared safe to both parties, and that their decline was the result of an unexpected depression in the housing market. BoA further contends that “AIG is the very definition of an informed, seasoned investor,” and that they fully assumed the risk in purchasing the bank’s potentially high yield securities.

As we have stated several times, the underlying theme that constitently presents itself throughout the media analysis of BoA’s pre-courtroom saga is the lack of regulation in the securities industry. While it is unclear as to which industry player has the upper hand here, all bear some fault—BoA for marketing the securities in the first place, AIG for creating a market for them, the ratings agencies for ensuring their legitimacy, and perhaps most of all, the government for failing to regulate. Had these toxic assets not hit the market in the first place, the transaction and subsequent dispute would never had occurred and the economy may be much better off. Along with it, our clients, many of whom had mortgages resold to Wall Street banks before the crisis, would have been better off, too.

August 2nd. The day looms over the American public drearily, as failed negotiations leading up to the imposing government debt deadline make the possibility that the United State will default on its debt all the more likely. We have heard from pundits and economists that the consequences would be devastating, that inflation would soar and unemployment would also increase, all while spiraling the U.S. economy into a double-dip, “U-shaped” recession. The consequences of default on some facets of the U.S. economy seem more apparent than others, like the demand for government issued securities and the market for our bonds. Among all of the apocalyptic speculation about what would happen if we defaulted, however, little commentary has emerged focusing on the housing market.

However, Christian Weller of the Washington-based Center for American Progress, a left-of-center think tank, had already analyzed the effects that a potential default would have on the housing market as early as last May. Now, Weller’s analysis seems all too apropos, as default increasingly looks like it could be a real possibility. Back in May, long before most analysts even considered a default scenario, Weller wrote in a CAP brief that “if Congress fails to raise that ceiling then the U.S. housing market would most likely experience a severe double-dip contraction marked by lower housing sales and depressed home prices.” It turns out, albeit not surprisingly, that the potential downgrade of treasury securities and the depressed market for government issued bonds could have a devastating effect on the housing market as well.

The brief goes on to outline six main contentions as to what a default would mean for housing: 1) mortgage interest rates will rise more than U.S. Treasury rates; 2) mortgage rate will remain high for some time; 3) new home sales could drop to record lows; 4) existing home sales will decrease; 5) housing prices will drop in the wake of fewer sales; and finally, 6) the economy will suffer.

Throughout the analysis, a subtly consistent point emerges: mortgage rates are directly tied to treasury interest rates, and thus, higher treasury interests would translate to higher mortgage rates. Because U.S. government debt is perceived to be an almost risk-free investment, a default would very likely increase the interest rate on U.S. Treasury bonds. As the table above shows, the correlation with between increased debt and higher mortgage rates are staggering.

But what’s worse, according to Weller, “the assumption is that even if the debt ceiling is not raised in August, members of Congress will eventually come to a budget agreement to pay for the government’s operations and pay the outstanding debt.” However, even a temporary default will have an impact a major, perhaps permanent impact on interest rates, as investors, for the first time, will associate risk with U.S. debt.

While all of this may come across as overly abstract and theoretical, the effect that a default will have on the housing market, and more specifically, on St. Ambrose and the Baltimore community, will be huge. To name just one example, much of revenue that helps fund our operation here in Baltimore comes from home sales [hyperlink], as our inventory of competitively-priced, high quality homes in the Baltimore area has long been an asset building and neighborhood stabilizing resource for low and middle income homeowners of Baltimore City. With higher mortgage rates, however, fewer and fewer families would realistically be able to secure a home loan that may fund even our modest properties. This fact coupled with the recent news that a median income Baltimore resident may be unable to afford a Baltimore home makes the prospect of a default significant.

Beyond this, our foreclosure prevention department, which is swamped with cases, would certainly have to shoulder an increase in clients. More foreclosure and less affordable housing means more vacant properties, depressed mean home values in neighborhoods, and depleting household equity for Baltimore families. In total, the effect on our community would be devastating, and we hope that our two major political parties will find a way to stave off this disaster. Time will tell.

Late last month, Bank of America, one the nation’s largest mortgage servicers, entered into a settlement agreement with multiple investors, in what has been hailed as one of the most significant settlements involving mortgage-backed, toxic assets since the onset of the financial crisis. At $8.5 million, the settlement, at least on its face, seems to present an optimistic message for investors, who can now maintain some measure of hope that legal remedies exists for the opaque, sometimes fraudulent securities on which they spent their money.

But a closer look at the agreement reveals a different picture. While $8.5 million may be a convincing figure to some, the value of the mortgages held by the Bank of America totals at about $172 million, meaning that Bank of America secured a deal in which they were obligated to pay back less than five cents on every dollar. This statistic has prompted many, including New York Attorney General Eric Schneiderman, to demand more information about the settlement. Schneiderman and other critics suspect that the deal was put together hastily and unfairly: the New York Times reports that the investors involved in the settlement hold interest in merely one quarter of the 172 million in assets. Moreover, because of the legal parameters of such a settlement, the deal would have a comprehensive effect, foreclosing claims from investors and individuals that may hold interest in the BoA loans but were not privy to the settlement negotiations.

More specifically, the settlement involves loans held by a BoA subsidiary, Countrywide Financial, which BoA purchased in late 2008 under what was apparently a disaster mitigation circumstance. While BoA has every incentive to get rid of the Countrywide loans, given their toxicity and total lack of profitability, they neglect to consider the far-reaching policy effects that the deal will have. Most conspicuously, the settlement will almost certainly accelerate foreclosure processes, which will impose devastating consequences on families. These foreclosures will have broader economic ramifications. According to Times columnist Paul Krugman, the settlement:

“would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale — an increase in supply. An increase in the supply of a good usually pushes that good’s price down, not up. Why should the effect on housing go the opposite way?”

Indeed, as Krugman writes, this settlement presents yet another example of letting bankers of the hook. Furthermore, the Countrywide mess and the subsequent short sale of the firm to BoA indicates the crucial need for greater regulation of asset-backed securities, the danger of which is now well documented. The deal will certainly affect our job at here at St. Ambrose, where our foreclosure prevention team negotiates with banks everyday in an effort to stymie foreclosures. Settlements like this one set a precedent of “going easy on the banks,” as Krugman writes, enabling them to feel that they are beyond legal remedies for honest negotiation. Such settlement will, in other

President Obama with Elizabeth Warren, Prospective Head of the New Consumer Financial Protection Bureau

To many of us, developing greater consumer protection measures is common sense: every day, we see families foreclosed out of their homes or evicted from their rental units because they did not (or in fact could not) understand the financial product they purchased. On the lending side, which we see much more commonly at St. Ambrose, these products often come in the form of adjustable-rate-mortgages. In such a loan, the initial interest rate often starts low but rapidly increases over time, leading the mortgage holder to believe that they are getting a deal at first only to find out later that they will be unable to make payments and may end up in foreclosure.

We’ve come across situations in which homeowners were not told that the interest rates would rise over time or where banks have misrepresented the product entirely, suggesting that the interest rate is fixed. The latter scenario happens frequently when banks market products to buyers whose first language is not English. Sometimes, we even see direct credit lenders selling products to low-income, under-resourced clients in order to “help” them purchase a home. Often times, hidden fees are imbedded in the loan product, whereby the buyer is penalized substantially for late payments.

These stories are common among housing counselors. Beyond the housing world, other industries have long played the same game. Credit cards, for instance, often fail to clearly disclose the interest rate for buyers intending to pay a lower-end monthly installment. Rent-to-Own schemes are another classis example. Companies that engage in International Money Transfers—or companies that help Americans transfer money to family members and friends over seas (a multi-billion dollar industry)—often fail to disclose remittance fees, or transaction fees they charge customers. Likewise, these companies frequently do not notify their customers of the exchange rates on transfers, which, for obvious reasons, can be crucial to the amount of money a customer is willing to send and the commensurate fee they will owe.

These situations are the reason for the creation of the new Consumer Financial Protection Bureau, for which the White House has selected Professor Elizabeth Warren to head. As the CFPB’s excellent website explains, before the financial crisis, the federal government could not adequately monitor the market for unfair (and perhaps illegal) practices because too many different agencies existed with varying roles; inevitably, cracks emerged, and sleazy companies slipped through them. The CFPB intends to rectify this problem by functioning as a centralized agency that monitors predatory scams across industries.

Beyond its importance to consumers, the Bureau is crucial on a systemic level. Perhaps the main cause of the financial crisis was the proliferation of securitized loan products, (many of which were backed mainly by home mortgages). Investors (and the Wall Street banks that facilitated their purchases) demanded these products highly, incentivizing main street banks to continue to hand out credit, even when buyers were less-than-credit-worthy. Eventually, this chain, coupled with the lack of government oversight, poor public policy, and failed public-private partnerships, collapsed, leading to the recession.

The CFPB would ensure that products like poor loans do not pervade the market like they once did, which would lead to significant economic consequences. Moreover, Ms. Warren, a Harvard law professor with an unimpeachable record of standing up for Average Joes, is the woman for the job.

However, Congress must confirm her first, and backed by special interests, the confirmation may not materialize. (For the latest example of crude opposition, see here). Whatever happens, we know that kick starting the CFPB, a project that his been on the drawing board for years now, would make the job of St. Ambrose and similar non-profits around the country much, much easier.

Let me rephrase: the outlook isn’t optimistic, per se, but rather, it may be more optimistic than what we may be thinking or than what our worst nightmares suggest. That’s about what I can discern from the new study by the Joint Center for Housing Studies at Harvard, “The State of the Nation’s Housing.” Evidently, the study does not aim to be conclusive. Rather, it compiles a broad array of metrics and empirically gathered data that address America’s housing crisis.

The study is significant on at least two fronts: for starters, it provides much needed in-depth data concerning widely observed phenomena in the housing market, such as a the “rental rebound,” or the rapid rise in demand for rental properties as a result of buyers’ shift towards a preference for renting, which strongly contrasts with consumer behavior from the early part of the decade. The study also presents detailed figures on the affordability problem for would-be buyers as well as graphs depicting the unfortunate acceleration in vacant properties nationwide.

Beyond these trends, which housing experts had widely discovered before the study’s publication, the study also succeeds in extrapolating upon less examined factors and less obvious residual effects of the housing crisis. For instance, the authors look at the ways in which demographic trends have exacerbated the housing crisis, a theme that is not often considered in housing discussions.

Here, the authors point out the severe deficit in buying from the generation they deem as “echo boomers,” or those Americans born in the year 1986 and afterward. (This would put the oldest echo boomer at twenty-five). Apparently, while this generation is “entering their peak household formation years,” household growth plummeted among this group in the second part of the last decade. (As an echo boomer myself, I can think of only one peer of mine who owns a mortgage). The authors, while pointing out that the huge influx of young adults will likely harm the housing market further, also speculate that the effect will be more pronounced when coupled with the retirement of the baby boomers, who will no longer contribute to the market.

The authors also provide a handy graph demonstrating the strong effect that the expiration of the first-time homebuyer tax credit had on the market (see the graph below). According to the authors, once the timeframe for the tax credit lapsed, many “would-be homeowners were locked out at the top of the market. And were then scared away as both home prices and employment plummeted. The question now is whether, without the incentive provided by tax credits, first-timers will have the will to buy.” Other topics examined include the rising utilities costs for low-income tenants, the decreasing supply of low-income housing, and the financing habits of homeowners from various income groups, to name just a few,

However, the tone of the study’s conclusory “Outlook” section contrasts sharply with virtually all of the previous data presented. The authors state, “while still under the shadow of the foreclosure crisis, the housing market may be starting—however slowly—to turn the corner.” They then introduces merely a single statistic to back this bold and frankly bizarre contention: that the amount of loans at least ninety days delinquent but not in foreclosure are falling. Are you convinced?

While I can’t possibly summarize everything in this detailed analysis, I would encourage readers to the take a look at the study here.

Last week, the Paper of Record published an editorial prompting the question “as goes housing, so goes the economy?” While this maxim may be axiomatic for some, it is important to understand why the interrelationship between housing, the financial system, and the broader economy is not only close but also tremendous. As the Times points out, the unceasing depression in the housing market “isn’t just bad news for homeowners. Selling and buying houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling equity dents consumer confidence, making things even worse”

The Times correctly indicates that the touted seven-month drop in foreclosure filings caters to falsely optimistic prognostication. Optimists see the drop as a sign of greater job stability nationwide, less income fluctuation, and more consumer confidence. However, the more palatable reason for the decline may be banks’ recent practice of slowing down the foreclosure process, a practice that in part signals a greater incentive for lenders to comply with federal regulation, something painfully lacking over the past few years. However, the slowdown is also the direct result of banks’ increasing unwillingness to deliver properties back to the market, as the prospects of a sale remain brutally grim.

As for the answer to this apparent problem, the Times editorial staff states, again correctly, that the “Obama administration’s main antiforeclosure effort has fallen fall short of its goal to modify three million to four million troubled loans.” The piece goes to establish that the reason for this shortfall:

Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.

True, however, the Times, like most of the media, fails to appreciate the overwhelmingness of the aforementioned regulatory failure. As Talk to St. Ambrose has repeatedly contended, the mains problems with Obama’s antiforeclosure program—which, for the record, is the Home Affordable Mortgage Program, or HAMP—are much more severe than what the Times identifies as the “basic flaw,” or the fact that bank participation isn’t mandatory. Rather, banks routinely refuse to comply with regulations, and the government has lost the ability to enforce their own requirements (see Bryan Sheldon’s March 22 Post for guidance).

As for the solution to this problem, the paper suggests “tough national standards” for mortgage servicers, whereby banks could not initiate a foreclosure or a “foreclosure-related fee” while an attempt at modification is taking place. Without explanation, the Times then states that “national servicing programs could succeed where antiforeclosure programs have failed, namely, in compelling banks to clean up the mess they did so much to create.”

Here, the paper expressly advocates for a measure that has been pointed out many times before, by state attorneys general among others (and should be regarded as little more than common sense, not a “solution” to the housing crisis). Moreover, the paper seemingly glosses over the severity of the problem in failing to call for comprehensive financial reform, which simultaneously regulates investment banks’ securitization of home loans as well as local banks’ lending practices, something, which we have also commented on in the past.

So yes, as goes housing, so goes the economy, indeed. But the problem is huge, and fixing it requires tremendous regulation, bipartisanship, and hard work in this already trying time. The rhetoric should consider this imposing reality, painting a more accurate picture of the problem.

This week, several sources have reported new information indicating that a colossal backlog of foreclosed properties has amassed, where banks, unable to convert the repossessed homes into sales, simply hang on to them for an indefinite period, with no discernible hope that a transaction may take place. While most Americans are keenly cognizant of the foreclosure crisis, even housing experts found themselves shocked to come across some of the newly released statistics: according to the New York Times, lenders “own more that 872,000 homes as a result of the groundswell in foreclosures, almost as twice as many as when the financial crisis began in 2007.”

In addition to demonstrating that the crisis never really ended, this figure suggests that policies aimed at prevention have not worked, and in this severe economy, middle-income families throughout the nation continue to face the constant threat of losing their most valuable asset. In Atlanta, for instance, “lenders are repossessing eight homes for each distress home they sell,” a staggering ratio. The ratio is six to one in Minneapolis, and in “once hot” markets like Chicago and Miami, whose real estate is among the most expensive in America, the ratio still remains about two to one. Indeed, if banks continue to foreclose while maintaining a systematic inability to sell, this glut is sure to continue, signaling that there really may be No End in Sight.

The Times offers two reasons for the glut: “inadequate staffs” and “delays imposed by lenders because of investigations into foreclosure practices.” While it’s difficult to comment on the former without further information, the latter cause is surprising, since such “investigations” were presumably initiated to assist foreclosure victims and therefore help families stay in their homes. Of course, if these “investigations” were effective—assuming the term refers to an overhaul of foreclosure practices—then the end result should be a decrease in lender owned homes, not the other way around.

While the paper concedes that “the biggest reason for the backlog” is that it takes longer to sell a foreclosed property than owner-owned home, the paper goes on to suggest that slowing down the foreclosure process has contributed to this stagnant market.

In contrast to this suggestion, home owners require a more drastic overhaul of foreclosure practices, not less. The writer seems to miss the point that stymieing the process often diverts foreclosure altogether, benefiting the home owner and the bank alike. Indeed, the Times would serve the public by presenting this backlog in a much more nuanced fashion. While the investigations may slow down sales in the short term, they serve a larger purpose of ensuring that faulty practices that should never have taken place began to finally desist. Moreover, while the policies encouraging the investigations have too often fallen short, they are nevertheless crucially important. It’s easy for both parties to scapegoat government programs like HAMP, but to really curtail the rise of lender owned homes, the government must strengthen aid programs, ensuring that that enforcement mechanisms exist and that homeowners have the ability to access the services of HAMP and similar programs in an efficient and understandable context.

In short, while this problem is enormous, the first step to mitigating it is to prevent foreclosure altogether, and for that, we require more government programs and yes, more investigations into unfortunate practices (take, for example, the Washington Post columnist Dana Millibank, whose home was mistakenly foreclosed upon. And as Paul Krugman points out, there’s no reason to think that this is an exception).

Unfortunately, all indications suggest that this won’t happen. Proposed cuts in HUD have already taken place, and, coupled with a federal government obsessed with spending cuts, this could only mean one thing: less foreclosure prevention help, the return of unethical lending practices, and no solution to growing stock of foreclosed homes that no one is willing to buy